Saturday, May 13, 2023

Market and Economic Update

I'm sure you've heard the news that the US economy is heading for a mild recession. This is the most expected recession ever. Signs of trouble started showing up over a year ago, and the signs still say we're heading for a recession.

The Federal Reserve Bank of New York says the recession probability in the next twelve months is 68.22%, the highest since 1982.

NY Fed Recession Probability Chart

A recession is when the economy shrinks; many define it as six months of negative GDP growth.

According to the Bureau of Economic Analysis, the first quarter's GDP was 1.1%, and the Federal Reserve Bank of Atlanta GDPNow estimates the second quarter's GDP will be 2.7%.

1st Quarter GDP Chart

2nd Quarter Federal Reserve Bank of Atlanta GDPNow Chart

Ahead of a recession, consumer confidence drops, and people spend less and save more. That's bad news for businesses that rely on consumer demand.

The University of Michigan, Consumer Sentiment Survey, shows consumer sentiment is falling.

Consumer Sentiment Survey Chart

Ahead of a recession, banks often raise lending standards and hold more cash. The Federal Reserve Bank of New York released the first quarter's Senior Loan Officer Opinion Survey on Bank Lending Practices. Survey respondents reported tighter standards and weaker demand for commercial and industrial loans. Survey respondents also reported tighter standards for both mortgage and consumer loans and weaker demand for mortgage loans, and consumer loan demand was mixed.

The Fed is raising interest rates to fight inflation. Inflation is coming down but not as quickly as many had hoped. The Federal Reserve may have to keep raising rates higher than many expect to bring inflation down to its 2% target.

Inflation Rate vs. Fed Funds Rate Chart

How will this elusive recession begin? As Ernest Hemingway once said, "Two ways. Gradually and then suddenly." This quote is often used to describe how someone goes bankrupt. But it can also be used to describe how economies go into recession. The onset of a recession can be slow and then suddenly become more severe. I think we're experiencing a period of gradual economic weakening that may begin to accelerate.

Interest rate traders are currently pricing in rate cuts beginning in September, with six cuts over the next twelve months. If the Fed is cutting rates that quickly, I would expect it to be in response to a significant financial event or rapid slowing of the economy. I hope these expectations are wrong.

Fed Funds September 2023

Fed Funds May 2024

What are some things you can do to make it through a recession? There's no one-size-fits-all answer, but here are some general tips.

  • Save more and spend less.
  • Build an emergency fund that can cover at least six months of expenses in case you lose your income or face unexpected expenses.
  • Pay down your debt. High-interest debt can eat up your cash flow and make it harder to cope with financial shocks. Try to pay off your credit cards and other loans as soon as possible.
  • Consider diversifying your income. This could mean getting a part-time job or starting a side hustle.
  • Review your budget and make cuts where possible. This may mean eating out less, canceling unnecessary subscriptions, or finding ways to save on your energy bill.
  • Stay positive. A recession can be stressful and scary, but it's not the end of the world. Remember that recessions are temporary and usually followed by periods of growth and recovery.

Friday, May 5, 2023

Market and Economic Update

This week, market volatility continued as concerns about regional bank stability, Fed interest rate policy, and the possibility of a recession weighed on investors’ minds with the S&P 500 closing down 0.71% for the week. Let’s look at some of the latest economic data and see what it suggests about where the economy and markets may be headed.

For the most part, the S&P 500 has been range-bound between 3800 and 4200 for the past year. Up or down days shouldn’t cause much excitement or worry right now. A catalyst is needed to break out of this range.

Chart - Trading-Range


The Federal Reserve Bank of New York updated its recession probability estimate to 57.77% - the highest it’s been in 40 years!

Chart - NY Fed Probability of Recession

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rose to 47.1 last month, remaining below 50 and indicating a contraction. Meanwhile, the Manufacturing Prices Paid Index increased to 53.2, showing rising prices paid despite slowing manufacturing.

Chart - ISM PMI


The Job Openings and Labor Turnover Survey (JOLTS) report shows a decline of 3.85% in non-farm job openings from last month, with 9.59M openings. The gap between job openings and unemployed persons is narrowing.

Chart - Unemployed Persons vs. JOLTS


ADP private payrolls surged by 296K in April, beating expectations of 133K! This is further evidence that the labor market remains strong. The most significant gains were in leisure and hospitality, followed by education, health services, and construction. The financial and manufacturing sectors lost jobs in April.

Chart - ADP Private Payroll Report

As expected, the Federal Reserve raised the federal funds rate by 0.25% to 5% - 5.25%. This marks the 10th rate increase and the fastest pace in 40 years. Equity markets fluctuated during the Fed Chairman’s press conference and closed lower. Despite speculation that this is the end of the rate cycle, the Fed left the door open for future hikes and no plans for rate cuts this year. This week’s interest rate hike brings the Fed Funds rate to the same level as just before the Great Financial Crisis. While conditions are different, it’s interesting to note that this is the level where instabilities in some financial institutions began to be exposed.

Chart - Fed Funds Now vs. Great Financial Crisis


Weekly initial claims for unemployment insurance were 242K bringing the 4-week average to 239,250.

Chart - Weekly Jobless Claims


The U.S. Bureau of Labor Statistics reported that April non-farm payroll employment rose by 253K, and the unemployment rate decreased to 3.4% which ties the record going back to 1969, while labor force participation remained steady at 62.6%. Average hourly earnings also increased by 0.2%. Low unemployment and rising wages potentially contribute to higher inflation and may prevent the Federal Reserve from easing monetary policy as quickly as some expect. The upcoming Consumer Price Index (CPI) report will provide further insight into the impact of the tight labor market on inflation. The Fed may act in response to significant disruptions within the banking system.

Chart - Monthly Unemployment Rate

With much of the earnings season behind us, it’s clear that while earnings have decreased year over year, they have still exceeded expectations. Next week, investors will shift their focus to inflation data while continuing to monitor the stability of regional banks.